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3. The following model is proposed for a set of variables. y = βο + βιX1 + β2Χ2 + β3Χ3 +ε Based on the following correlation

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Answer #1

The problem is wit the high correlation among the x1, x2 and x3.

Considering x1 the correlation between y and x1 is -0.825 whereas x1 is more related to x2 ( -0.978 ) and x3 ( 0.936 ) than y. And the correlations are significant.

Similarly, considering x2 the correlation between y and x2 is 0.829 whereas x2 is more related to x1 ( -0.978 ) and x3 ( -0.904 ) than y. And the correlations are significant.

Similarly, considering x3 the correlation between y and x3 is -0.718 whereas x1 is more related to x1 ( 0.936 ) and x2 ( -0.904 ) than y. And the correlations are significant.

Hence, there is a problem of multicollinearity.

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